High-Dividend Stocks

Dec 8, 2011 by

New York Stock Exchange

Wall Street's House of Worship

As of this writing, the highest rate nationally on a 1-year CD is 1.15%. That’s $11.50 interest per year for every $1,000 invested. Subtract the tax on interest income, and taking out a CD seems hardly worth the effort. Moreover, CD rates have been near zero for years as Federal Reserve Chairman Ben Bernanke stays awake nights printing money to help preserve the remains of the U.S. economy.

Wall Street to the Rescue

The high-powered Wall Street marketing machine—ever vigilant for opportunities to boost the portion of the world’s money it “manages”—suggests high-dividend stocks as an alternative to CDs for those who want more income from their investments.

So What’s a Dividend?

Companies that generate through their business a lot of cash often choose to make quarterly payments to owners of their stock. This payment, set by a company’s Board of Directors, is called a dividend. A “dividend yield” is the annual dividend paid—the most recent quarterly dividend times four to annualize it—divided by the current price per share of the company’s stock. For example:

AT&T stock closed on December 7, 2011 at $29.40 per share.

AT&T’s most recent dividend payment—made November 1, 2011—was $0.43 per share, or $1.72 annualized (4 x $0.43 = $1.72)

AT&T’s current dividend yield = $1.72 / $29.40 = 5.85%

Yes indeed, 5.85% is pretty appealing compared to that irritating 1.15% CD rate, especially after you factor in that the Federal income tax rate on corporate dividends is one-half the rate on CD interest. But perhaps there’s more to consider than yield?

The Sales Pitch

I read yesterday an article titled “Need Income? Take a look at dividend stocks.” Here’s an excerpt:

“Many safe, blue-chip stocks offer dividend yields much higher than 10-year Treasury notes. In addition to providing higher yields than Treasuries, dividend stocks give you a chance for capital appreciation that Treasuries don’t, assuming you hold them until maturity.”

Two observations, if you please:

  1. There is no such thing as a “safe” stock, at least by the definition of “safe” that prevails everywhere but Wall Street.
  2. Implying that stocks are a superior investment to U.S. Treasury notes (the rough investment equivalent of a bank CD with respect to yield and safety) partly because they can appreciate (go up in value) if you held the Treasury note until maturity borders on deception. First, stocks can also go down in value, while a Treasury note purchased at issue and held until maturity cannot. Second and more importantly, once issued, Treasury notes go up and down in value too, and who says you have to or would want to buy individual Treasury notes (instead of a Treasury note mutual fund) or hold a Treasury note until maturity? As the writer undoubtedly knows, U.S. Treasury notes have been better investments than high-dividend stocks over the past 5 and 10 years, due almost totally to rising Treasury note values! For example, the Vanguard Intermediate Treasury Fund has posted an average annual return of 7.20% over the past 5 years, while Vanguard’s High Dividend Yield [Stock] Index fund returned 0.15% per year during the same period.

No Free Lunch

Before you invest a lot of your money in dividend stocks to chase a high yield, consider this:

“Safe,” blue-chip, high-dividend AT&T stock dropped from $39.67 per share on June 2, 2008 to $20.90 per share on October 6, 2008, tanking a head-pounding 47.3% over just 125 days. $10,000 invested in AT&T stock on June 2 would have been worth $5,268 on October 6. $10,000 invested in a bank CD on June 2 would have been worth $10,000—plus accrued interest—on October 6. I can’t match wits with the wizards of Wall Street, but in my little pea-brain, that would seem to exemplify a big difference between “safe,” blue-chip, high-dividend stocks and CDs or Treasury notes.

Yes, I know there are loads of statistics—and Wall Street’s marketers excel most at self-promoting numerology—that high-yield stocks have been a better investment than Treasury notes, “over the long term.” So a key question about stock investing: Will the long term over which Wall Street argues stocks will prove to be the best investment be reached before I run out of money or die?

  • Rich

    Good, sound information which certainly provides input into investment decision making.

  • Goodnightkourt

    High
    Good things to note, I mean, where does a guy put the money? Where? Where? Where? Okay, I’m done.

  • amy

    Sounds interesting – thanks for clarifying things…

  • Elias

    Simple and easy to understand advice. Makes perfect sense for someone who doesn’t have a lot of money to invest, but wants to make the most of their investments.

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